Pensions auto-enrolment: Very welcome scheme still has hurdles to leap

Not for the first time, however, a grand reform proposal in this country has become bogged down. In fact, the auto-enrolment concept has been knocking around for rather a long time. Britain's former Chancellor, George Osborne, managed to introduce auto-enrolment into the UK around a decade ago and this is one Osborne reform that has taken hold.

The Government here has planned to introduce the reform here next year. Under the plan, for every three euros paid in by an enrolled member, a matching amount is provided by the employer and a euro is coughed up by the State. 

It is a way of sugaring the savings pill and it is one that appears to have worked well with most employees where the scheme has been introduced elsewhere. It is a class example of 'nudge' economics where workers are automatically signed up to a savings scheme, but have the right to opt out. The key here is consumer inertia, a phenomenon most apparent in the financial sphere.

The problem is that the task of putting in place the new arrangement is an onerous one from an administrative point of view, both for the State and for the many employers who will be affected. Employers will also face an added cost burden at a time when many businesses having (hopefully) recovered from the pandemic are grappling with across-the-board inflationary pressures.

The scheme has its attractions. The skills of service providers would be purchased through a central authority with charges being driven down.

One could understand why the pensions industry might be in two minds about the whole idea.

Media coverage of the cost of living crisis might persuade us that most people are living from day to day, financially. Certainly, a large cohort are stuck in a rickety, leaking boat when it comes to their finances. However, many people have benefited from a rising economic tide that has boosted numbers at work past the 2.5 million mark. There is evidence that many are, in fact, keen to save.

So just how are they putting money aside?

The global research firm, Mintel, estimates that the total savings of consumers across the island has exceeded €200bn, this year, with around €140bn being accumulated in the Republic of Ireland.

In fact, the cost of living crisis has boosted the savings habit with almost 60% of people in the Republic more inclined to put more money away as a result.

The shakeout in the IT sector appears to have strengthened the tendency to put something aside for the rainy day.

The lockdown may also have promoted a sense of thrift.

Mintel interviewed more than a thousand people. The researchers asked people about the reasons for saving.

Some 47% were putting funds aside for that rainy day, 30% for a holiday, 25% for home improvements while around one quarter — thinking long term  — were paying towards their retirement. By the way, 20% — typically, young men — were saving up for a vehicle.

Clearly, savers come in all shapes and sizes. There are the truly thrifty and then there the short-term saves getting ready to splash out.

There is all to play for. Around 16% of Republic of Ireland interviewees were planning on starting a pension as against just 10% in Northern Ireland.

So much for Presbyterian thrift!

Almost 80% of interviewees have some level of savings or investments. There is clearly a big market out there for auto enrolment. The question is whether one will be available in time, or is this yet another can that will be kicked down the road?

Plans questioned:

Some lawyers have warned that the plan as currently constituted has serious flaws. In one recent post, the law firm Wiiliam Fry suggested that employers could face a challenge matching their existing pensions schemes with those under automatic enrolment. 

It is pointed out that whereas contributions to existing schemes are deducted from pay net of tax, the plan under AE is to make deductions from gross earnings.

Firms are advised to consider amending existing schemes.

There are concerns that the yawning gender pensions gap could be exacerbated. Auto-enrolment and its attendant benefits applies only to those earning over €23,000 a year. This would exclude those — many of them women — in a wide range of part-time jobs such as hospitality and care work.

The proposed minimum age of 23 is high by international standards and is seen as discriminating against people who have taken up jobs early rather than opting for third-level education.

There are also administrative hurdles to be surmounted including the task of setting up the overarching central processing authority.

This has led the head of brokerage Aon Ireland, Rachael Ingle to describe as a "mammoth task" that of getting the AE plan up and running by the end of 2024 as the Government has vowed to do.

It is a decade since the commitment was made to deliver on the recommendations of the OECD review of the Irish pensions system. It cannot be left to wither on the vine.

In May, the Oireachtas Social Protection Committee chaired by Deputy Denis Naughton issued 21 recommendations aimed at tightening up the reform proposals.

Its proposals are based on extensive testimony from stakeholders such as ICTU, the Pensions Authority and employers group, IBEC.

The Committee has called for the removal of the €20,000  annual earnings threshold on the grounds that it penalises low earners, predominantly young or female. It is calling for a strong governance framework with annual evidence-based reviews and for the provision of investment advice to AE scheme members to assist them in selecting between the funds on offer with a view to gearing their investment to their own needs.

Interestingly, the Committee has also called for an examination as to why only one-fifth of funds of Irish pension funds are invested in domestic shares and bonds.